Pollution Costs and GDP

Instead of the intellectual vandalism that typifies too much of Paul Krugman’s writing, it would be more useful if he returned to writing about economics…with facts. In a recent column he says:

So if you really believed in the logic of free markets, you’d be all in favor of pollution taxes, right?

Hahahahaha. Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right.

What evidence does he use to support this cynicism? Krugman points to the billions of dollars of estimated damage from pollution as proof that the American right is unwilling to address pollution issues. He ignores the phenomenal pollution control costs we already pay and the surprising political forces behind them.

A recent article in the American Economic Review (subscription required) by Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus lays out a procedure to modify national income accounting to adjust for the negative impacts of pollution. This interesting academic paper tackles a tricky problem and is full of caveats regarding what the various components of gross domestic product do and do not measure and how to interpret their pollution-costs findings.

The irony is that the industry that is far and away the largest contributor of air pollution, in the Muller analysis, is the coal-fired electricity industry. In fact, of the 17 largest contributing industries (listed in their Table 2), coal-fired power accounts for 39 percent of the pollution costs.

Where’s the irony? The vast majority of the coal-power-generation pollution costs (86 percent) are supposedly the result of sulfur dioxide (SO2) emissions, but SO2 emissions in power generation have been covered by a cap-and-trade law, signed by the elder President Bush, for 15 years.

In short, Krugman’s pollution-pricing plan is already in place. An even bigger irony, in light of Krugman’s accusation, is that conservative think tanks tended to support SO2 cap-and-trade while the environmental groups tended to oppose it as a sellout to industry. (By the way, the SO2 cap-and-trade mechanism is very different in scope, scale, feasibility, and cost from the CO2 cap-and-trade plans offered in the last several years.)

Muller et al. argue that the cap levels for SO2 need adjustment; others would argue not, but either way, that is a very different debate than whether “today’s American right” believes in externalities.

A couple of interesting points from Table 2 of Muller:

The second and third largest contributors to air pollution damages are crop production and livestock production. (After you ask some farmers how little the EPA regulations impact their business, ask Krugman what pollution tax scheme he has in mind for them and how it would affect food prices.)

The cost of air pollution emitted by sewage treatment facilities is nearly five times the value added by the process of cleaning the sewage. This highlights why the numbers in the article need to be interpreted carefully—something Muller et al. are careful to do—since it is very unlikely that sewage treatment plants have a negative net impact on our well being and environmental quality.

In addition to cap and trade for SO2, we have instituted an extensive—and costly—set of pollution controls in virtually every area of the economy. Over the past 30 years, the EPA has issued 550 guidance letters for light vehicle regulations alone.

David Kreutzer is the research fellow in energy economics and climate change at The Heritage Foundation's Center for Data Analysis. In this position, Kreutzer researches how energy and climate change legislation will affect economic activity at the national, local, and industry levels. Read his research.

Join The Discussion

Krugman is absolutely ridiculous. No one said anything about zero regulations. He's being irrational suggesting the riddance of what government is called to do without including the obvious, unconstitutional overreach within government control!! Hold these crooks and cranks ACCOUNTABLE!! PROTECTION THROUGH GOVERNMENT IS ONE THING! GOVERNMENT OVERPROTECTION IS IMPRACTICAL AND EXTREME!

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